Real Estate Deal Analysis & Advice

Case Study: How I Bought My First Apartment Building [With Pictures!]

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
230 Articles Written
multifamily-benefits

After years of acquiring and investing in single family rental homes, I recently purchased my first apartment building. Here is the breakdown of my first apartment building purchase to provide some valuable insight if you decide to make the leap into multifamily investing.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Backstory

My partner and I wanted to expand and grow our portfolio. We decided to branch out into multifamily. Our criteria was 40-unit buildings and above because, in our eyes, it takes the same amount of work to acquire one large apartment building as multiple duplexes or triplexes, etc. Plus, with the right infrastructure, it’s easier to manage one building, in a single location, versus units spread out in different areas.

Acquisition

There’s this pocket near the south side of downtown that has been pretty run down for quite a while. Everything around the location is prime. I’ve driven it over the past couple of years and kept my eyes on the two apartment buildings right across the street from each other.

At the time, one of the buildings had been vacant for quite a while. The other was a pretty run down “mom and pop”-owned building. Prior to this deal, we established local relationships with brokers and contacted sellers directly to find off-market deals. I happened to notice more recent renovations on the vacant building. Then I drove by the other one and noticed it was in distressed condition, as mentioned.

I went to my laptop to research and noticed it was previously listed at $1.4M on LoopNet, but got taken down. I contacted the seller directly by tracing his information from the public records, which I found through a simple Google search. He had recently sold a couple of his other properties and was looking to transition from being an active landlord to a full-time debt collector. That’s a good sign of a motivated seller! We spoke briefly, during which he stated that a previous deal fell through and recommended we speak with his sister, who was brokering it. He was also adamant that “if you’re not willing to put $50k down for earnest money, don’t bother with proceeding with the deal.”

Underwriting

After speaking with the broker, I asked for the rent roll and T-12. The T-12 breaks down the actual income and expenses of the building over the last 12 months.

We determined that in order to make this deal work, we needed to be near $1M for the purchase. Based upon the T-12, our cap rate was 7% at the current 50% occupancy rate, but when repositioned, we’d be closer to 10-11% cap rate.

Negotiation

After determining what we would pay, we shot the price over to broker. We started low. I believe it was just $600k. The seller countered at a much higher figure. During this time, my partner and I reached out to a few investors—including Gino Barbaro and Matt Faircloth, as well as other local people in the multifamily space—to get extra sets of eyes on the deal. With our infrastructure, the numbers would work at a significantly higher price. Our mistake was underwriting the deal too conservatively. We came up on our offer to $900k and went under contract. The seller was interested in carrying back a portion of the purchase price, which was good for us. We only needed to put down $200k.

Inspection

During our inspection, we had the inspector walk ALL of the units, which was good but unnecessary in my opinion. That was our second mistake. It is a must for the investor to walk all the units, but not necessarily the inspector. The report was 80+ pages and repetitive when it came to detailing each unit. It was good to learn this lesson, though. In conclusion, the report showed the building needed work, but nothing too alarming. The biggest thing was configuring out the decks and balconies so they would sustain themselves and guiding water from the property.

Renegotiation

Nobody wants to labeled as a “re-trader,” but in our scenario, once we ran the numbers, we were cash flow negative. The first couple of months were at the current interest rate to seller, and our term of one year was too short. Jake and Gino recommended we get that extended. They also threw out the idea of interest only. We posed the terms to the seller and ended up settling on 3% the first year, 5% the second, and 7% third year with a 3-year balloon payment on a 25-year amortization.

Work Needed

We wanted to give the place an entirely different look and feel. We started off by changing the signage and name after acquiring the property. We plan to address the exterior of the property  first, along with upgrading and renovating other aspects of the property. Everything else we have quoted in the scope of work here. Our in-house GC helped with that.

Contracts

We decided to outsource our laundry to Coinmach with a 90% us/10% them, split after they get the first $14 per machine. The laundry brings in approximately $400 per month. We’re not looking to make too much money on this. It’s essentially something nice we want to provide for our tenants. We’re still considering some type of cable provider as well.

In Conclusion

Despite starting the deal in October and not closing until April, it was a great experience. It’s always exciting to dig up great deals—and it’s even better when they close. We learned a lot, including how to save on inspections, the best ways to structure seller financing deals, and the great value to be found in working with others on BiggerPockets.

Have you tackled your first multifamily deal yet? Any questions about this property?

Let me know with a comment!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
Read more
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    If anyone wants to see the numbers please be sure to DM me. I am unable to link to numbers in comments.
    Nathan Lindley from Hillsboro, Oregon
    Replied over 3 years ago
    Great job! Thanks for the play-by-play! Always useful when you’re new to larger property. I hope to follow in your footsteps!
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Thank you for the kind words! Keep at it!
    Rashad Nelson Rental Property Investor from Douglasville, GA
    Replied over 3 years ago
    Hi Sterling, Wow, what a deal! Based on your numbers, I count (46) units that you picked up for less than $20K per door initially, then after renovations, the cost was just under $30K per door. Amazing, that’s a home run my friend. Congratulations. Quick question – how long did all the renovations take to get completed? There’s a few deals in my neck of the woods where the properties are extremely dilapidated and I have a local mentor that’s doing a few right now, but she’s running into a lot of issues with the local government. Most advise to stay away from these and get something that’s cash flowing. What’s your take? Congrats again man!
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    1. The renovations will take between 12-18 due to previous tenants at property. We have to wait to their lease ends in order to renovate those units. 2. I personally invest in something that is already producing cash flow. Those large projects with no paying tenants is too risky for me. If you’re experienced in developing those types of assets and the numbers work then proceed. Seems risky though. Hope that helps.
    Holly Baum Real Estate Agent from Loveland, Colorado
    Replied about 3 years ago
    Love this!!! Thanks for sharing. Hoping one day to do the same!
    Reuben H. from Albany, NY
    Replied almost 3 years ago
    Sterling, I’m looking to buy a 8-12 unit building that’s already cash flow positive and not in need of renovations. I have my eye on a few and and missed out on one last week that was on market less than 24 hours. Question: how much time does this project consume? I’m usually out of the country and don’t want to be flying in once a month to hold hands or waking up at 3 am to make phone calls during local business hours.
    Don Taylor New to Real Estate from Raleigh, NC
    Replied about 1 year ago
    Great article!!
    Dakari McAdoo Realtor from Washington, DC
    Replied 6 months ago
    Can someone let me know why it isn't good to walk the WHOLE property with the inspector?